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Common Bank Terminology that we all Should Know

Posted by on Oct 26, 2012 in Finance | Comments Off

Earning money is no simple task. When it comes to your finances, you don’t trust just anybody to manage your funds. You have spent hours going through painstaking efforts to ensure that you have the very best financial advisor. And while the area of finances does not particularly interest you, you certainly recognize its significance. 

Since banking and money matters are so important, don’t you think it’s time to go over some basic banking terms? You don’t want to look like an idiot the next time you visit your bank or talk with your financial advisor and they mention something like a “balloon payment”. When you hear phrases like that, you don’t want to be scratching your head without a clue—you want to be able to astound the entire room by how much you know about the subject. 

Here are a few bank terms that everyone should understand:

  1. Interest: You probably already have a basic concept of what interest is—but did you know that it has two different meanings? The definition of the word “interest” depends upon which area of banking you are referring to. For instance, if you were speaking about your credit cards or some kind of loan, then “interest” would refer to an additional fee that you have to pay every month on your debt balance. But, if you were talking about your savings, money market, or checking accounts, the “interest” in any one of those scenarios would refer to the monthly amount that you receive for holding the account.
     
  2. Deposit Rates: When you deposit your money into your account, your bank can then use your funds to loan out to other customers at a fee. When you put your money into your savings account, the bank will get the impression that you will be an account holder with them for an extended period of time. Therefore, they can confidently lend that money to someone else, say, for expanding their small business. The depositor (whose money is being lent) will receive a return percentage for his or her money. This return is called a deposit rate.
     
  3. Debit and Credit: When you pay for your groceries at the store, the cashier has likely asked you “will that be credit or debit?” when you hand them your ATM card to swipe. Credit is when you charge a transaction to your account. With credit, you are able to buy a good now with the understanding that you will pay for it at the end of the month when you receive your credit debt balance. Debit works essentially the same way. But, instead of waiting to pay for the transaction at the end of the month, it is paid for immediately upon approving the card swiping transaction.
     
  4. Balloon Payment: This is a mortgage payment. The name indicates the payment schedule. During the first few years, the payments will be small in order to decrease the amount of debt on the loan. As the years go by, the payments are significantly larger than they were in the beginning. 

In reality, the terminology frequently used by bankers sound far more complicated than the actual process to which they refer. Once you understand the concept of the system, you will catch onto those phrases quickly.

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